So you think you know the long-term investment strategy game, do you? But how long is long term? A year? Ten years? Twenty-five years? A lifetime? And how do you start? With a single stock? A group of stocks? An index fund or ETF? In other words, what’s your “LTIQ?” Take this quiz and find out.
1. What does “long-term investment” mean?
A. You buy stocks with the intention of holding them for the rest of your life.
B. You buy stocks, bonds, and other financial instruments to hold for more than a year.
C. You buy in May and go away for 25 years.
D. You buy a basketful of stocks and use dividend reinvestment plans (DRIPs) to continually up your ante in the basket.
Answer: B. The textbook definition of a long-term asset is one held for more than a year, but long-term investing can include saving for medium-or long-range goals such as the purchase of a home, saving for college, and retirement. It might also mean the assets you plan to pass along to your heirs.
2. Long-term investors implement buy-and-hold and passive investment strategies, somewhat heedless of the day-to-day happenings in the markets. True or false?
Answer: True. Long-term investors can ride out volatility and occasional down markets. In fact, one strategy, dollar-cost averaging, views down markets as an opportunity to accumulate more shares for the same dollar outlay. Many long-term investors say you should stay patient and don’t get emotional if the markets take a downturn.
3. The easiest way to start a buy-and-hold strategy is to find a stock you love and invest all you have in it. True or false?
Answer: False. Financial professionals commonly encourage new investors to diversify their portfolio with a mix of assets, such as a target ratio of 60% stocks and 40% bonds, or a 70:30 ratio. Some look for low-cost investment vehicles such as index-based securities to create a portfolio mix.
4. Which investments historically have produced the highest annual return?
C. Real estate
Answer: A. Determining the highest annual return depends on your time horizon, but overall, the S&P 500 has turned in the highest average annual return of about 9.8% since its inception in 1928.* Adjusted for inflation, the historical average annual return is around 7%, with much of the gains derived from dividends rather than purely share price.
5. Reinvesting dividends isn’t important because dividends are such small amounts. True or false?
Answer: False. It’s true that the per-share amount of a quarterly dividend can be a “put-it-in-the-tip-jar” amount, but depending on the number of shares you own, reinvesting those nickels, quarters, and dollars can really add up. Dividend reinvestment plans (DRIPs) can be an easy-peasy, hands-off way for you to turn that spare change into additional shares, which can in turn pay dividends of their own.
6. Once you’ve signed on to a buy-and-hold strategy, you never have to think about it again. True or false?
Answer: False. Stuff happens, and so does age. You should review your investments periodically to ensure your long-term objectives are still being met. Sometimes a portfolio will deviate from your target portfolio mix because of outsize returns of one asset class over another. Sometimes a fund will have what’s called “style drift,” where its holdings, sectors, or concentrations change. And as you move through various life stages, your objectives change, too.
7. Once you’ve invested a chunk into a buy-and-hold asset, you’re done. You never have to invest again. True or false?
Answer: False. Investing is a discipline, just like saving. And like saving, you might consider setting aside a percentage of discretionary income each month through an automatic deduction. Putting your savings on autopilot can ease the burden of thinking about it month after month. And compound returns can potentially improve returns.
8. There’s no such thing as a free lunch. True or false?
Answer: True. But if there’s one thing that comes close, it’s an employer-sponsored 401(k) plan, especially if your employer will match your contributions up to a certain limit. The beauty of retirement accounts such as IRAs and 401(k) plans is the tax advantages of your participation in them.
So, how did you do? If you got them all correct, congratulations. If not, congratulations anyway, because you should now have a deeper understanding of long-term investing.
Hands-On Goal Planning
Planning for tomorrow involves setting financial goals today. Want to know if your plans are on track?